Research Publications

Behind the Numbers: PCE Inflation Update, September 2013

This update, prepared by Dallas Fed Senior Economist Jim Dolmas, provides an in-depth analysis of the latest personal consumption expenditures (PCE) inflation data. Updates will be posted monthly, following the release of the official PCE data by the Bureau of Economic Analysis. NOTE: Terms in bold are defined in the Inflation Update Glossary.

The headline PCE price index increased at a modest 1.0 percent annualized rate in September. The biggest positive contribution to September’s headline rate came from gasoline, which posted a moderately hefty increase in price of about 10 percent at an annualized rate. Declines in price for women’s and girls’ clothing (down an annualized 11.5 percent); games, toys, and hobbies (down an annualized 22 percent); and furniture (down 9.6 percent) were among the factors holding down the headline rate in September. Those three components combined to shave about 0.5 annualized percentage points off the headline inflation rate, more than offsetting gasoline’s positive contribution of roughly 0.3 annualized percentage points.

The 6-month headline rate increased to an annualized 1.0 percent from 0.6 percent in August, while the 12-month headline rate dipped to 0.9 percent from 1.1 percent.

The Dallas Fed’s Trimmed Mean PCE inflation rate was an annualized 1.5 percent in September, similar to its readings over the prior two months (1.5 in August and 1.4 percent in July). The six-month trimmed mean rate held steady at an annualized 1.2 percent, and the 12-month trimmed mean rate held at 1.3 percent. The 12-month rate has now been constant at 1.3 percent for six months.

That 12-month trimmed mean rate of 1.3 percent continues to be our rule-of-thumb forecast for headline PCE inflation over the coming 12 months.

Energy Prices Up in September; A Likely Reversal Coming in October’s Data

As noted above, gasoline prices increased 10 percent at an annualized rate in September, or 0.8 percent at a monthly rate. Other energy components posted similarly sized gains—at monthly rates, fuel oil prices were up 0.9 percent, electricity services were up 0.5 percent and natural gas services were up 1.8 percent. Taken together, prices for energy goods and services increased 0.8 percent for the month. Given the historical volatility in energy prices, that increase counts as a rather modest price swing.

On a 12-month basis, the prices for energy goods and service, taken as a whole, are down 3.3 percent.

When PCE data for October are released, we should see September’s increase in energy prices more than reversed. Gasoline—the largest energy component by expenditure weight—fell significantly in price in October, according to weekly retail price data from the Department of Energy. The DOE data show average retail gasoline prices falling 5.1 percent for the month. Taking account of the normal seasonal price decline in October—about 2 percent—we should see a seasonally adjusted drop in price of about 3 percent in October’s PCE data. That movement would subtract about 0.1 monthly percentage points from October’s headline rate, or about 1.3 annualized percentage points.

Food Price Gains Continue at a Modest Pace

Prices for food as a whole fell an annualized 1.3 percent in September, as prices for less-processed food items tumbled an annualized 5 percent, while prices for more-processed food items were essentially unchanged (up just 0.1 percent at an annualized rate).

Fresh vegetables—easily the most volatile component within the food category—made the biggest impact on both overall food prices and the headline inflation rate. Down at a roughly 16 percent annualized rate in September, fresh vegetables subtracted about 0.1 annualized percentage points from September’s headline inflation rate.

Since September 2012, overall food prices are up 1.2 percent, with less-processed components up 3.6 percent and more-processed components up just 0.3 percent.

Apart from food and energy, prices for core goods fell in September (–1.5 percent at an annualized rate) while prices for core services rose modestly (1.5 percent annualized). We already noted in the introduction some of the biggest-impact items among core goods—women’s and girls’ clothing; games, toys and hobbies; and furniture. All three experienced outsized price declines in September and combined to subtract about 0.5 annualized percentage points from September’s headline inflation rate. At the other end of the spectrum, only watches and prescription drugs made it into our “top 10” of biggest-impact price increase—the two components combined to contribute about 0.1 annualized percentage points to September’s headline inflation rate.

Among core services, the biggest-impact items at each end of the price-change spectrum were familiar faces (read: typically volatile components). The price index for hotels and motels, down about 7 percent at an annualized rate, was the biggest-impact price decline among core services, shaving just under 0.1 annualized percentage points off the headline inflation rate. The price index for the nonfee services of commercial banks, up 22 percent at an annualized rate, had the biggest impact among core services posting outsized price increases, adding just over 0.1 annualized percentage points to September’s headline inflation rate.

The six-month inflation rates for core goods and services each ticked down a tenth of a percent in September—core goods to an annualized –0.5 from –0.6 in August, core services to 1.6 percent from 1.7 percent. The 12-month rates for both held steady: –0.7 percent for core goods, 1.9 percent for core services.

Last, what about the “big three”? Regular readers of the Inflation Update will recognize this as our term for the three components of core services combining the biggest expenditure weights and the lowest volatility: rent, owners’ equivalent rent (OER) and the price index for dining out.

In last month’s update, we noted a robust increase in price for the big three, taken as a whole (3.1 percent at an annualized rate). With a caveat against reading too much into one month’s number, we noted that “these data will bear watching for signs of a sustained pickup.” No such signs were to be found in the latest release.

Compared with their respective rates of increase over the past several months, growth in rent and the price index for dining out were lower in September, significantly so in the case of dining out. Rent grew at a 2.4 percent annualized rate in September, compared with a 3.1 percent rate over the past six months. The price index for dining out—formally, “other purchased meals”—increased at a 1.0 percent annualized rate in September, compared with an average rate of 2.3 percent over the past six months.

Growth in OER in September was slightly above its recent average pace, coming in at an annualized 2.7 percent for the month compared with an average rate of 2.4 percent over the past six months.

Putting the components together, our “big three index” increased at an annualized rate of 2.3 percent in September, down from August’s 3.1 percent, and in line with the series’ six- and 12-month rates of increase (annualized 2.5 percent and 2.3 percent, respectively).